The Budget Endgame

The Budget Endgame


his year's extraordinary debate on the government's budget has many federal managers reaching for their Maalox. They may share the American public's diverse reactions -- optimism, cynicism, anger and amusement -- but they cannot share the public's sense of detachment. The magnitude of the deficit-elimination plan being considered by Congress, combined with the likely timing of the final decisions, is providing what will likely be one of the toughest combined personal and professional challenges of their careers.

In some cases, executives will find their own jobs on the line, as virtually every program (except Social Security and probably defense) is up for grabs either this year or at some point before the end of fiscal 2002. But even executives who don't fear for their jobs will have to deal with tremendous uncertainty about the funding levels for their programs, uncertainty that is not likely to be settled until months past the start of the fiscal year on Oct. 1.

In the interim, they will likely face a steady series of Perils of Pauline-style budget cliffhangers. For lack of appropriated funds, one or more work stoppages probably will occur. There will be uncertainty about whether the federal government will have enough cash to pay its employees and contractors and whether their banks will honor their paychecks. And at best, there will be conflicting information about what Congress and the White House are going to do to resolve various impasses on the budget.

Budget-related government shutdowns have occurred before -- four times during the Reagan-Bush years, as the two Republican Presidents sought spending reductions that were resisted by Congress, especially by strong Democratic majorities in the House. In 1981, 1984 and 1986, "nonessential" federal employees were sent home for one day. In 1990, the government shut down over Columbus Day weekend, closing national parks and museums.

But this year, with Republicans controlling Congress and its committees, the climate of uncertainty on budget issues is the most corrosive it has been in many years. The situation that prevailed during the 1980s is essentially reversed: Then, the President proposed cuts and Congress resisted; now, Congress is cutting and the President is raising objections. Congress has the upper hand in the battle, especially with regard to discretionary programs; the President's veto power, after all, cannot force an increase in appropriations. His veto may be more effective against legislation to cut entitlement programs, though the huge reconciliation bill congressional leaders have in mind will be so essential to deficit reduction that it will be difficult to reject.

Uncertainty is heightened by the advent of new congressional leaders and committee chairs, especially in the House. No one knew quite what to expect from Newt Gingrich, R-Ga., in his first year as Speaker of the House, and his hands-on style continues to evolve. House Budget Committee chairman John Kasich, R-Ohio, is an axe-wielding firebrand with seemingly boundless energy. He has been stepping beyond the usual role of Budget Committee chairman in his effort to ensure that policies assumed in the budget resolution are in fact written into law.

New to their jobs as well are Ways and Means Committee chairman Bill Archer, R-Texas, and Appropriations Committee chairman Bob Livingston, R-La. The cast of leaders in the Senate, in contrast, seems relatively familiar, as Majority Leader Bob Dole, R-Kan. and all the key committee chairmen were in the same roles when the Senate was last under Republican control, in 1986.

Deficit-Reduction Calculus

The magnitude of what is being considered this year is startling, and the cuts to be made will by no means fall evenly across the government's myriad programs.

The dimensions of the task were outlined earlier this year, as Congress set out to balance the budget. The Congressional Budget Office forecasts that, assuming moderate economic growth and no changes in current law, the government will run deficits totaling $ 1.9 trillion over the next seven years -- from fiscal 1996 through 2002. Over a comparable period, the last big round of spending cuts, enacted in 1993, saved only $ 400 billion to $ 500 billion.

The Republicans have ruled out tax increases, so all of the burden of erasing the deficit falls on the spending side. To balance the budget immediately would entail $ 230 billion in spending reductions in 1996, rising each year to $ 349 billion in 2002. Such large cuts could disrupt the economy, so CBO has suggested a more gradual course of deficit reduction. Deficits could be tolerated until 2002, starting with a $ 173 billion target in 1996, dropping under $ 100 billion in 1999 and disappearing three years later. This is essentially the course Congress adopted in late June in its fiscal 1996 budget resolution. But even after accepting some $ 600 billion in added borrowing between 1996 and 2002, Congress still has to find $ 1.3 trillion in spending reductions.

CBO has said this can be accomplished in three steps.

First, CBO showed that a relatively easy whack could be taken out of projected spending simply by eliminating assumed inflation adjustments in appropriated programs. Such adjustments were already ruled out through fiscal 1998 by caps on discretionary programs; the caps would now be extended through 2002. This step -- which Congress endorsed in its budget resolution -- would cut projected borrowing needs by about $ 200 billion.

Second, spending could be cut by an additional $ 900 billion starting in fiscal 1996.

Third, CBO reports that federal borrowing would be less because the first two steps would reduce debt-service requirements, saving another $ 200 billion. Not counting the interest savings, program reductions thus will have to total about $ 1.1 trillion over the seven-year period if the budget is to balance.

Spending cuts of this magnitude are almost unimaginable. Cuts of $ 1.1 trillion amount to about 10 percent of the $ 10.1 trillion the government is projected to spend under current law between fiscal 1996 and 2002, excluding interest costs.

Also, roughly half ($ 5.5 trillion) of the $ 10.1 trillion will be off limits to budget cutters: Social Security, defense and a number of other areas that, for technical or legal reasons, cannot be touched.

Without other policy changes, programs that spend the remaining $ 5.6 trillion would need to sustain cuts averaging 19.6 percent to bring the budget into balance. But, of course, this year's budget resolution also includes a $ 240 billion tax cut between fiscal 1996 and 2002. This will necessitate added spending cuts -- and mean that current spending programs would need to be reduced by an average of 24 percent.

Some programs will be cut by much more than these amounts. Congress is discussing reductions for some agencies, such as the Environmental Protection Agency, in the 30 to 40 percent range for next year alone. Other programs will be cut by less than the across-the-board percentages. Some public safety programs will be cut only minimally. Medicare and Medicaid -- the two biggest entitlement programs after Social Security -- also are slated for smaller-than-average reductions.

The deficit-reduction plan passed by Congress in June assumed that $ 440 billion of all of the spending changes needed to balance the budget by 2002 (not including offsetting a tax cut) would come from appropriations. To assure that this would happen, Congress extended caps on appropriated programs through fiscal 2002. That means the enforcement mechanism that has worked so well to limit the growth and force cuts in these programs since fiscal 1991 will remain in place for at least the next seven years.

Budget Stew

While implementing spending cuts is never pleasant, federal managers know that the job is easier if the required cuts are identified early in the fiscal year. That isn't going to happen this year, though.

Three things must occur for this year's budget process to be completed.

First, Congress and the President must enact the 13 regular fiscal 1996 appropriations. This part of the process is key for agencies and their managers, since it sets operating budgets that govern staffing and other administrative essentials.

Second, a reconciliation bill embodying the entitlement and tax changes assumed in the budget resolution has to be enacted. The changes will present administrative problems for those responsible for implementing them.

Third, an increase in the limit on federal borrowing will have to be enacted sometime in October when the current ceiling is reached. Without the increase, Washington will run out of cash sometime this fall.

The problem for federal executives is that while the appropriations bills may be their chief concern, the politics of this year's budget process will almost surely link heretofore routine funding bills to the more controversial reconciliation and debt-ceiling-extension measures.

To meet the strictures of the budget resolution, and for ideological reasons as well, congressional Republicans in July began acting on deep cuts in appropriated programs -- and adding controversial riders to appropriations bills on issues ranging from abortion to enforcement of environmental regulations. By the end of July, President Clinton had threatened to veto no fewer than 6 of the 13 regular appropriations bills. Few if any of the appropriations bills appeared likely to be enacted before Oct. 1.

At that point, of course, a continuing resolution will be required to fund the government on an interim basis. And here the politics will heat up. Congress may be unwilling to enact a continuing resolution that doesn't contain many of the controversial riders Republicans have promoted. And it might well insist on a resolution that hews closely to House-passed appropriations levels, entailing deep cuts in amounts budgeted by Clinton. For these reasons, the President could veto the continuing resolution itself. This would cause a work stoppage for some period of time starting Oct. 1, jeopardizing the paychecks of hundreds of thousands of federal workers who cannot legally be paid without duly enacted spending authority.

The White House began planning for such an eventuality in midsummer. In a briefing for the Cabinet on July 26, White House chief of staff Leon E. Panetta said congressional Republicans "seemed fully prepared to shut down the government for an extended period" -- perhaps as long as two months. The next day, Office of Management and Budget director Alice Rivlin distributed a memorandum instructing agencies not to implement reductions in force or office closures in reaction to congressional budget action until OMB had developed a government-wide plan for fiscal 1996. Even under a government-wide shutdown, essential services would continue to be provided, in line with an Attorney General's opinion issued during the Carter Administration holding that essential activities like issuance of Social Security checks and air traffic control can continue without appropriations.

The reconciliation bill will almost certainly include spending and taxing changes that the White House opposes and so could also be vetoed. Although a vetoed reconciliation bill would not stop the government from operating, it would prevent major deficit reductions from being put into place. As a means of pressuring the President to approve the reconciliation measure, therefore, Congress may consider combining the continuing resolution and reconciliation into a single bill. By vetoing the entitlement and tax changes, Clinton would then also be shutting down the government.

The debt-limit increase is considered to be "must pass" legislation because without it, the government will literally run out of cash to pay its bills. Within about four weeks, the Treasury would find itself hard-pressed to pay Social Security benefits, contractors and salaries even for essential employees.

The debt-limit bill thus could be the ultimate weapon of the most committed congressional budget-cutters, who are talking seriously about combining it with the prospective continuing resolution/reconciliation bill into what surely would be one of the largest pieces of legislation ever to emerge from Congress. If Clinton dared to veto that measure, in one fell swoop he would be shutting down the government, preventing the deficit-elimination plan from going into effect and limiting the government's ability to meet its financial obligations. This is the so-called "train wreck" scenario that many have been talking about for the past few months.

Timing of the Wreck

In an ideal world, all of this would come to a head by Oct. 1 so that federal employees would at least know what they are facing as the fiscal year begins. But, given the extent of the congressional agenda, the budget-process requirements and the high political stakes, that's just not likely.

The process itself isn't geared to that deadline. All House and Senate committees that received reconciliation instructions have been given until Sept. 22 to decide how they will achieve the required savings. So there is virtually no way a reconciliation bill can be enacted by the start of the fiscal year.

In fact, there seems very little chance of enactment by the beginning of November.

If history is any guide, all House and Senate committees involved with reconciliation will take most or all of the time allowed to develop their spending-cut recommendations. Even if Congress decided to work through the weekend, there would be only eight days to get the House, Senate and White House to agree on the assumed massive spending changes and a tax cut before the new fiscal year begins.

But this year there will be an additional step in the process that will slow everything down even further: certification by the Congressional Budget Office that the proposed reconciliation bills will in fact balance the budget by fiscal 2002. In the Senate, the Finance Committee cannot even start to consider a tax cut until CBO provides its certification. The process should last until about Oct. 1.

Assuming CBO does certify that the deficit would be eliminated, each budget committee will then have to package everything into a single reconciliation bill, write and file a report and bring the bill to the full House and Senate for debate. The House would have the additional step of getting its Rules Committee to approve a rule governing the debate. If there are no snags, all of this should take about five days, but with a weekend and the Jewish holidays intervening, debate would not likely begin in the House and Senate until mid-October.

Debate in the House could take as much three days. Debate in the Senate, which is limited by the Congressional Budget Act to 20 hours, could take three days or more. Therefore, the conference between the House and Senate on reconciliation would not start until late October.

In the past, with less consequential measures pending, reconciliation conferences have often taken four to six weeks to complete. A smooth, two-week conference wouldn't finish until the beginning of November; Thanksgiving might be a more realistic completion goal.

After House and Senate approval, the bill would go to Clinton, quite possibly not until early December. A veto fight would delay things further. It's not hard, therefore, to imagine a situation where reconciliation is not approved until Christmas. And if the negotiations between the White House and Congress are protracted, the agreement could occur after Jan. 1, 1996.

Prolonged delays on the reconciliation act will affect the nature and timing of the anticipated "train wreck." The most serious wreck will happen if reconciliation, the continuing resolution and the debt limit bill meet at the same time. If reconciliation is not sent to the President until Thanksgiving or later, only two of the three "trains" will collide. A government shutdown could occur then, of course, as Clinton might veto the continuing resolution.

Or, Congress could pass a continuing resolution to fund the government until the expected date of reconciliation and approve a short-term increase in the debt ceiling to extend the government's borrowing authority until the same time. The big train wreck might then come later in the fiscal year.

Albert Kliman, a longtime federal budget director who recently completed a term as president of the American Association for Budget and Program Analysis, characterizes the current situation as one of "total chaos." Kliman says agencies and departments have prepared for shutdowns before when it appeared that appropriations would not be enacted in time. But, he says, agencies' established procedures do not cover the combined problems that will be presented to managers by this year's budget process, since "we have never really been through this before."

The Path to Balance

The budget resolution Congress passed on June 29 followed a fiscal path toward budget balance that had been outlined earlier by the Congressional Budget Office. The course Congress set tolerates about $ 600 billion in additional deficit spending from 1996-2002. It also entails some $ 900 million in program cuts. Added savings come from continuing the current hold on inflation adjustments in discretionary programs after 1988 and from assumed savings in debt-service costs. Figures are in billions.

                     1996  1997  1998  1999  2000  2001  2002 1996-2002

Baseline Deficit    $ 210 $ 230 $ 232 $ 266 $ 299 $ 316 $ 349   $ 1,902

Target Deficit        173   154   114    66    54    21     0       582

Required Reduction    -37   -76  -118  -200  -245  -295  -349    -1,320

Program Cuts          -36   -72  -107  -161  -173  -186  -200      -934

Inflation              --    --    --   -19   -38   -59   -80      -196

Debt Service           -1    -4   -11   -20   -34   -50   -69      -212

SOURCE: Congressional Budget Office

Where the Cuts will Come

More than 40 percent of program cuts Congress ordered in its fiscal 1996 budget resolution will come from discretionary programs subject to year-to-year appropriations decisions. The rest will be taken out of entitlement programs, chiefly Medicare and Medicaid. Budget savings are also assumed from adjustments in some programs), from savings in debt service and from the budget effects of higher economic growth that's projected as a result of the fiscal policy the resolution dictates. The resolution calls for a $ 240 billion tax cut over the seven years it covers. The figures below show the cumulative (fiscal 1996-2002) effect of the budget resolution on projected budget deficits, in billions of dollars.

             House-Passed Senate-Passed Conference

Program Cuts

 Discretionary   -$ 413         -$ 472      -$ 440


  Medicare         -288           -256        -270

  Medicaid         -187           -175        -182

  Student loans     -19             -4         -10

  Other            -178           -194        -161

   Subtotal        -672           -629        -623

Taxes, Other

 Revenues          +321           +179        +240

 Debt service      -162           -203        -182

 CPI rebenching     -48            -18         -18

 Fiscal dividend -1,143         -1,332      -1,182

SOURCE: U.S. Congress

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